Annuity Factor Method

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

BREAKING DOWN 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Fixed Amortization Method

    One of three methods by which early retirees of any age can access ...
  2. Fixed Annuitization Method

    One of three methods by which early retirees of any age can access ...
  3. Annuity Table

    A method for determining the present value of a structured series ...
  4. Term Certain Method

    A method of calculating minimum distributions from a retirement ...
  5. Life Expectancy Method

    A method of calculating annuity payments, by dividing the balance ...
  6. Deferred Annuity

    A type of annuity contract that delays payments of income, installments ...
Related Articles
  1. Retirement

    When Annuities Are the Wrong Investment

    Understand how annuities provide several unique benefits, but many drawbacks as well, and identify the situations where they are not the best investment.
  2. Retirement

    How a Fixed Annuity Works After Retirement

    These popular investments can provide a steady stream of income during your retirement years. Here are the details.
  3. Financial Advisor

    Annuities and Baby Boomers: The Pros and Cons

    The pros and cons of annuities that Baby Boomers seeking retirement income need to know.
  4. Retirement

    Are Annuities Right for You?

    Annuities are safe and often appealing, but IRAs and 401(k)s offer advantages that annuities typically can’t match, with little additional risk.
  5. Personal Finance

    An Overview Of Annuities

    These contracts provide a guaranteed income stream. Learn how they work and their benefits.
  6. Retirement

    Retirement Tips: Choose the Best Annuity Provider

    It pays to get the best advice if you are thinking of putting your money into one of these complicated investments.
  7. Retirement

    Variable Annuities: A Good Retirement Investment?

    Variable annuities provide lifetime payments and tax-deferred growth, but – given their hefty fees – are they right for you?
  8. Retirement

    Annuities: A Good Option in Turbulent Times?

    Annuities can be an enticing option as Americans near retirement, but there are several reasons to be wary of them.
  9. Financial Advisor

    Advising FAs: Explaining Annuities to a Client

    Conceptually speaking, annuities can be thought of as a reverse form of life insurance.
  10. Retirement

    Variable Annuities: The Good, The Bad and the Ugly

    An in-depth guide to everything you need to know and watch out for with variable annuities.
RELATED FAQS
  1. Which is wiser, rolling over my traditional IRA to variable annuity or vice versa? ...

    I am 46 years old. I have a traditional IRA and Variable Annuity. What will it cost me to roll either way? ... Read Answer >>
  2. What is the best way to fund my pre-retirement years?

    I am trying to postpone taking social security until the age of 65/66 in order to maximize the amount I get every month. ... Read Answer >>
  3. Are there penalties for withdrawing monies invested in annuities?

    Learn about the penalties associated with taking early withdrawals from an annuity. Steep penalties are assessed by the insurer ... Read Answer >>
  4. What's the difference between an individual retirement account (IRA) and an annuity? ...

    Both IRAs and annuities are helpful retirement savings tools, but there have distinct difference you need to be aware of ... Read Answer >>
  5. Can I borrow from my annuity to put a down payment on a house?

    Learn how you can borrow money from an annuity for a house down payment, but also understand why fees and penalties make ... Read Answer >>
  6. What can I do if I bought an annuity and don't want it anymore?

    Consider possible repercussions of cashing in your annuity policy. Depending on the circumstances, this could cost you. There ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center